February 23, 2023 By Suzanne Robertson

Credit scores can be confusing! But if you’re interested in an SBA loan, it’s worth your time to learn about this important metric and how it may impact your loan application. 

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What is an SBA loan?

SBA loans are government-guaranteed small business loans typically made available to eligible U.S. entrepreneurs through banks and other financial institutions. These loans have long terms and low rates that lead to very low monthly payments.  

There are lots of ways you can use SBA loan proceeds to save money and grow your business. Working capital and debt refinance are two popular uses of funds. Business owners use SBA proceeds for things like hiring, marketing programs, equipment, inventory, and more. 

If your business is in solid financial health, has been operational for more than two years, you’re likely a good candidate for an SBA loan. Another important factor is having a strong credit history. Learn more about credit scores below. 

What is a personal credit score?

A FICO personal credit score is a personal credit scoring system created by the Fair Isaac Corporation. It’s presented as a 3-digit number derived from detailed information about your credit history. Your personal score can affect things like car loans, mortgages, and your ability to qualify for a business loan.

Why is a personal credit score important?

In short, your personal credit score is a reflection of how well you handle your personal finances so comes into play with SBA loan requirements. These 3 numbers show your financial habits and help lenders assess risk. Banks and other lenders want borrowers who can make payments in full for the life of the loan. A credit score can be an indicator of a good borrower. 

Credit score quiz 

Here’s a quiz to check your smarts about this important metric.

Question 1

If I have a strong business credit score, my personal credit score won’t matter when seeking a small business loan.

Answer: False

As a business owner, you might not think personal scores are important. Think again. If you’re seeking a small business loan, your personal credit score will be one important number considered and may impact the cost of that loan. In general, the higher the credit score, the lower the loan cost.

Question 2

Your personal credit score shows lenders your annual income and marital status.

Answer: False

Your personal credit report includes a healthy amount of information but the following does not appear:

  • Salary
  • Employment status
  • Marital status and spouse’s credit history
  • 401(k) balance

See if you pre-qualify

Question 3

Personal credit reports simply reveal a number.

Answer: False

Consumer credit reporting agency Experian outlines the information included in personal credit reports.

  • Personal information: Your name, including any aliases or misspellings reported by creditors, birth date, Social Security number, current and past home addresses, phone numbers, and current and past employers.
  • Accounts: A list of your credit accounts, including revolving credit accounts, like credit cards, and installment loans, such as mortgages or auto loans. The list includes creditor names, account numbers, balances, payment history and account status (including whether or not the account is past due).
  • Public records: Court judgments, bankruptcies, and tax liens.
  • Recent inquiries: Who has recently asked to view your credit report and when.

Question 4

Your personal credit report helps lenders determine your personal annual income.

Answer: False

Your personal annual income does not come into play with your personal credit score. Jim Anderson, a management counselor for SCORE, explains why personal credit scores are so important. “A major consideration for a lender to make a loan is the ‘character’ of the borrower,” Anderson says. “Lenders want to loan money to people who have a positive track record for paying their obligations as agreed.”

Question 5

Payment history is weighted more than other factors when calculating a personal credit score.

Answer: True

Your personal credit report is calculated by looking at the following:

  • 35% Payment History
  • 30% Amounts Owed
  • 15% Length of Credit History.
  • 10% Type of Credit Used (Revolving, installment, mortgage, etc.)
  • 10% New Credit

Question 6

I can get a free copy of my credit report.

Answer: True

Every consumer is entitled to one free copy of their credit report every 12 months from each of the three nationwide credit reporting bureaus, Equifax, Experian and TransUnion. Be wary of sites outside of these three that offer free credit reports. Many are only free for a short time period then you have to pay. It’s always a good idea to read the fine print when dealing with your finances. 

Question 7

Equifax, Experian and TransUnion will report the exact same personal credit score.

Answer: False

While most of the information collected on consumers by the three credit bureaus is similar, there are differences. For example, one credit bureau may have unique information on a consumer that is not being captured by the other two.

SBA loan requirements 

To prequalify for an  SBA loan for $30,000 to $350,000 from a SmartBiz bank partner, the business owner’s personal credit score must be above 650. Lenders may also look at debt coverage, debt usage, and business revenue trends. Additional factors considered include:

  • Time in business must be above two years
  • Business must be U.S. based and owned by a U.S. citizen or lawful permanent resident who is at least 21-years old
  • No outstanding tax liens
  • No bankruptcies or foreclosures in the past 3 years
  • No recent charge-offs or settlements
  • Up-to-date on government-related loans                                                                 

Typically, businesses approved for an SBA loan from banks that participate in the SmartBiz lending network have $50,000 to $5 million in annual revenues and 1 to 40 employees. Most are profitable and have a positive cash flow. All can provide proof that they are able to make the monthly loan payment.

The bottom line

You’ve probably heard that it’s hard to get an SBA loan and that the process can be time consuming. While that can be true, being organized, choosing a lender with great customer support, and working with your accountant can help lessen the approval time. 

Here’s why an SBA loan from a bank in the SmartBiz network can be a good opportunity to strengthen your business and save money:

  • SBA loans have longer terms. An SBA loan from a bank in the SmartBiz network is 10 years. 
  • You can get financing from $30,000 to $350,000
  • SBA loans offer some of the lowest interest rates available
  • With SBA 7(a) loans, you have a ton flexibility with your capital

If you think you’re ready, pre-qualify with SmartBiz here.

See if you pre-qualify